When I have it, I spend it

The Government's Budget plans are looking like Charlie McCreevy for slow learners

Yesterday saw the publication of the Government’s review of the National Development Plan and Summer Economic Statement. These contained promises to ensure the forthcoming budget “focuses on investment rather than consumption” and set out a longer-term plan “to transform the country, unlock housing, upgrade water and energy infrastructure, deliver more roads, and provide better public transport”.

All this is sensible stuff, aimed at addressing long-standing infrastructural deficits highlighted by the Irish Fiscal Advisory Council among others. There are also some welcome signs that the Government is aiming to tackle the overly stringent procedural requirements that are hobbling its ability to deliver the infrastructure and housing we need.

However, this broadly sensible approach to public investment contrasts sharply with the day-to-day Budgetary strategy set out in the Summer Economic Statement. This says that the Government plans to increase gross voted current expenditure by €5.9 billion or 6.4% next year while cutting taxes by €1.5 billion, but:

If there is a deterioration in the tariff landscape, Government will recalibrate its fiscal strategy – reducing the quantum of the budgetary package – in order to ensure that the public finances remain on a sustainable trajectory

Such a strategy has more than echoes of the “when I have it, I spend it” approach to fiscal policy made famous by former Minister for Finance Charlie McCreevy, as I argued on Newstalk Breakfast earlier this morning.

Committing to ramp up current expenditure if the good times continue but row back if things get worse is precisely the sort of pro-cyclical policy that the current Minister for Finance has himself said we should avoid. As well as stoking inflation, it risks leaving us more exposed to a sudden deterioration in the public finances (e.g. from the evaporation of corporation tax receipts) which could then - despite the commitments now - put capital spending plans on the chopping block.

But there is little sign of the Government heeding the call of the Central Bank to commit to a “credible fiscal anchor that enforces sustainable increases in net government expenditure over time”, or to take “concrete action to broaden the tax base”. Instead we have seen the Tánaiste talk of a “solemn commitment” to cut VAT for the hospitality sector: an expensive and economically illiterate policy that I wrote about for The Irish Times yesterday and which you can find re-produced below.

Ireland has experienced a remarkable run of luck since the economic recovery took hold more than a decade ago, with our public finances - buoyed by corporation tax receipts - the envy of most other countries. This has given us a huge opportunity to address our gaping infrastructural deficits. Let’s hope we don’t squander it.

Irish Times opinion piece on cutting VAT

The last few weeks have seen warnings about darkening skies on the economic horizon.

We are told that deteriorating prospects and the possibility of a trade war instigated by the United States mean that the Government will deliver a “much more cautious and restrained budget” this year than previously planned.

Yet an expensive and economically illiterate election pledge to reinstate a reduced 9% rate of VAT on hospitality appears to remain on the table, recently elevated to a “solemn commitment” by the Tánaiste Simon Harris.

Expensive

VAT is already levied on guest accommodation, catering and restaurant services at a reduced rate of 13.5% rather than the standard rate of 23% that applies to most goods and services.

Figures from Revenue suggest this amounts to a tax relief of almost €2 billion per year and that lowering the rate to 9% – as was temporarily the case from 2011 to 2019, and then again during the pandemic – would cost an extra €810 million per year.

Excluding guest accommodation from the cut would slightly lower the cost (to around €600 million), though it is not clear how feasible this would be. What rate would apply, for example, to a hotel package including dinner, bed and breakfast?

Either cut would be expensive, costing more, for example, than lifting 55,000 children out of poverty; indexing tax credits and bands by forecast inflation; or extending the full-rate of Carer’s Allowance to those currently receiving a partial payment or Domiciliary Care Allowance.

Economically illiterate

The economic case for prioritising a VAT cut over these other commitments in the Programme for Government is exceptionally weak.

This is reflected in the constantly shifting rationale provided by the sector for the cut: an evergreen response to whatever the issue of the day is.

Previously it was to stimulate demand by reducing prices. However, both Irish and international evidence suggests that such cuts were pocketed by business owners with subsequent increases passed onto consumers in the form of higher restaurant and hotel prices.

Now lobbyists for the sector claim a reduction in VAT is needed to preserve or increase profit margins, otherwise warning of “another catastrophic year of shutdowns and job losses”.

This is despite the fact the latest figures show there were 11 new companies incorporated for every liquidation in the sector, and that hospitality employment was 7% higher in the first quarter of 2025 than a year earlier.

Even if the sector wasn’t booming, cutting VAT is a terrible way of supporting any businesses that may be struggling.

That’s because the largest share of the gains from a VAT cut go to businesses with the highest turnover: those selling at high volume and/or high prices.

In other words, a VAT cut benefits owners of McDonalds and Michelin star restaurants more than a small café or restaurant.

Better alternatives

If the Government and sector really believes that some smaller cafés and restaurants are struggling and deserve support, there are countless better ways to provide this.

For example, the Government have previously paid a grant aimed at smaller hospitality businesses based on the size of their Commercial Rates bills, while long-delayed reforms to reduce litigation costs would help reduce insurance premia.

Given the availability of superior alternatives, competing priorities, and the worsening economic outlook, all that cutting VAT would achieve is to recklessly erode our already fragile tax base.

Doing so would be the final nail in the coffin of this Government’s claim to be responsible stewards of the public finances.

Dr. Barra Roantree is Assistant Professor in Economics and Programme Director of the MSc in Economic Policy at Trinity College Dublin.